On January 29, 2016, the Internal Revenue Service issued guidance on mid-year changes to safe harbor plans under Internal Revenue Code Sections 401(k), and 401(m). Notice 2016-16 significantly expands the permissible mid-year changes available to sponsors of safe harbor plans under prior guidance.

The Notice provides guidance on mid-year changes to a safe harbor plan or to a plan’s safe harbor notice content that do not violate the safe harbor rules on account of being mid-year changes. For purposes of this Notice, a mid-year change is one that is either effective on a day other than the first of the plan year or one that is effective on the first of the plan year but adopted after that date.

This expansion, of course, comes with a few requirements. Simply put, Notice 2016-16 requires that any changes must meet applicable notice and election opportunities and must not be on the list of prohibited mid-year changes.

Notice and Election Requirements

Not all mid-year changes require an employer to provide an updated safe harbor notice and election opportunity. Mid-year changes that do not alter required safe harbor notice content (even if the information is provided in a plan’s safe harbor notice) do not require any additional notice. Similarly, if the pre-plan year annual safe harbor notice included the required information about the mid-year change and its effective date, then no additional notice is required.

Any mid-year change that does alter a plan’s required safe harbor notice content requires both (1) an updated safe harbor notice that describes the change and its effective date and (2) a reasonable opportunity for the employees to change their cash or deferred and/or any after-tax employee contribution elections.

The updated notice must be provided within a reasonable period before the effective date, based on the facts and circumstances. Providing the notice between 30 and 90 days prior to the effective date is deemed reasonable. If notice prior to the effective date is impracticable, such as notice for retroactive changes, then providing notice as soon a practicable, and no later than 30 days after the change is adopted, is deemed reasonable.

A reasonable opportunity to change a cash or deferred election exists if an election period of 30 days is provided to employees. This election period must be provided prior to the effective date if practicable and, if not, as soon as practicable after the updated notice is provided (but not later than 30 days after the change is adopted).

Prohibited Mid-Year Changes

Notice 2016-16 explicitly prohibits three types of changes, and permits a fourth only if it meets additional requirements. These prohibited mid-year changes are:

  1. Increasing the number of years of service required to vest in safe harbor contributions under a qualified automatic contribution arrangement.
  2. Reducing or narrowing the group of employees eligible to receive safe harbor contributions. This prohibition does not limit an employer’s ability to make otherwise permissible changes under eligibility service crediting rules or entry data rules with respect to employees who are not eligible to receive safe harbor contributions as of the effective date or the date of adoption.
  3. Changing the type of safe harbor plan (for example, changing from a traditional 401(k) safe harbor plan to a qualified automatic contribution arrangement).
  4. Modifying or adding a formula used to determine matching contributions if the change increases the amount of such contributions or permitting discretionary matching contributions. However, this prohibition does not apply if, at least three months prior to the end of the plan year, the change is adopted and the required updated notice and election opportunity (described above) are met and the change is made retroactively effective for the entire plan year.

Additional Changes that are Not Provided Relief Under Notice 2016-16

Despite only prohibiting four specific types of changes, the IRS makes it clear that not all other possible changes are permitted. Certain mid-year changes will violate the safe harbor plan rules unless applicable regulatory conditions are satisfied, including adopting a short plan year, changing a plan year, adopting safe harbor plan status, reducing or suspending safe harbor contributions and changing from a safe harbor plan to a non-safe harbor plan. In addition to those examples, the IRS cautions that other laws may affect the permissibility of mid-year changes including anti-cutback restrictions, nondiscrimination restrictions, and anti-abuse provisions.

Moving Forward

It is likely that additional guidance on mid-year changes to safe harbor plans may be published later this year. The IRS has requested comments on whether additional guidance is needed, particularly for mid-year changes of plan sponsors involved in mergers and acquisitions.

This Notice is effective for mid-year changes made on and after January 29, 2016. The Notice also applies to 403(b) plans that apply the 401(m) safe harbor rules.